The debt ratio indicates what about a firm?

Study for the VCE Accounting Test. Utilize flashcards and multiple choice questions with detailed explanations. Secure exam success!

The debt ratio is a financial metric that measures the proportion of a firm's assets that are financed through liabilities. It is calculated by dividing the total liabilities of a company by its total assets. This ratio provides insight into the financial leverage of the company, indicating how much of the company's asset base is supported by borrowed funds as opposed to equity.

When the debt ratio is higher, it suggests that a larger portion of the company's assets is being financed through debt, which can indicate higher financial risk if the firm is unable to meet its debt obligations. Conversely, a lower debt ratio suggests that a greater portion of the firm's assets is funded by equity, which may signify financial stability.

In the context of the other options: the first choice talks about the percentage of assets financed by equity, which is the complement of the debt ratio rather than the ratio itself. The third option regarding total liabilities compared to net profit does not represent the calculation or focus of the debt ratio, as it mixes leverage with profitability metrics. Lastly, the option about asset turnover efficiency refers to the effectiveness of a company in using its assets to generate sales, which is unrelated to the concept measured by the debt ratio.

Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy